Sentra Sporting Company sells tennis rackets and other sporting equipment. The purchasing department manager prepared the inventory purchases budget. Sentra's policy is to maintain an ending inventory balance equal to 15% of the following month's cost of goods sold. January's budgeted cost of goods sold is $70,000. What is the amount of ending inventory that the company will report on its pro-forma balance sheet?

Question

Sentra Sporting Company sells tennis rackets and other sporting equipment. The purchasing department manager prepared the inventory purchases budget. Sentra's policy is to maintain an ending inventory balance equal to 15% of the following month's cost of goods sold. January's budgeted cost of goods sold is $70,000.  What is the amount of ending inventory that the company will report on its pro-forma balance sheet?

Quizplus · Accepted Answer

The ending inventory should be 15% of the following month's cost of goods sold, which is February. Since we only have the budgeted cost of goods sold for January, we need to calculate February's cost of goods sold first. Assuming that the cost of goods sold is relatively consistent from month to month, we can divide the annual cost of goods sold by 12 to get the monthly cost of goods sold. Let's say the annual cost of goods sold is $840,000 ($70,000 x 12). Then, the monthly cost of goods sold is $70,000 ($840,000 / 12).

Now, we can calculate the ending inventory for January by multiplying February's cost of goods sold by 15%: 
Ending inventory = February's cost of goods sold x 15%
Ending inventory = $70,000 x 15% 
Ending inventory = $10,500

Therefore, the answer is B, $10,500.

Sentra Sporting Company Sells Tennis Rackets and Other Sporting Equipment